Quick Facts

Mongolia’s economic freedom score is 55.7, making its economy the 125th freest in the 2018 Index. Its overall score has increased by 0.9 point, with improvements in monetary freedom, fiscal health, and judicial effectiveness outweighing declines in the government integrity, labor freedom, and government spending indicators. Mongolia is ranked 27th among 43 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.

After the collapse of the Soviet Union, landlocked Mongolia undertook market reforms and extensively privatized its formerly state-run economy. Foreign direct investments to extract its substantial mineral resources transformed the economy. The current government has tried to restore investor confidence but has failed to invigorate the economy in the face of the large drop-off in FDI, mounting external debt, and a sizeable budget deficit. Weak rule of law and lingering corruption are additional drags on the economy.

Background

After adoption of a new constitution in 1992, Mongolia transformed itself from a closed society ruled by a single-party Communist system into an open society and a dynamic multiparty democracy. This transition has been accompanied by the gradual introduction of free-market reforms and relatively well-maintained political stability. In 2016, Mongolians gave a parliamentary majority to the Soviet-era ruling party, the Mongolian People’s Party; in 2017, a member of the party representing Mongolia’s democratic movement was elected to the presidency. The economy and economic reform figured prominently as issues in both elections. Agriculture and mining remain the most important sectors of the economy. The majority of ethnic Mongolians today live in the People’s Republic of China.

Contractual rights are recognized, and Mongolia generally respects property rights, including intellectual property rights, but enforcement is weak. The judiciary is independent but inefficient and vulnerable to political interference. Pervasive corruption stems partly from a political culture that places a high value on personal relationships. Graft is endemic, and weak institutions do not enforce anticorruption measures effectively.

The individual income tax rate is a flat 10 percent. The top corporate tax rate is 25 percent. Other taxes include value-added and excise taxes. The overall tax burden equals 20.9 percent of total domestic income. Over the past three years, government spending has amounted to 37.8 percent of total output (GDP), and budget deficits have averaged 12.3 percent of GDP. Public debt is equivalent to 90.0 percent of GDP.

Mongolia has strengthened access to credit by setting up a new collateral registry. Labor laws are not particularly restrictive. Due to Mongolia’s long, harsh winters, employers with large outdoor operations tend to use significant numbers of temporary contract workers. Budget deficits generated by lower commodity prices have forced drastic cuts in some subsidies and put downward pressure on fuel subsidies used to offset the high cost of energy.

Trade is significant for Mongolia’s economy; the combined value of exports and imports equals 98 percent of GDP. The average applied tariff rate is 4.6 percent. Nontariff barriers impede trade. Government openness to foreign investment is below average. The financial system has undergone modernization, and the banking sector has become largely stable.